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It’s every lawyer’s worst nightmare: the call from a client that comes after months of working on a deal. It usually goes something like this: “We’ve been discussing this with all our senior people and the board of directors, and we just cannot get comfortable with the outstanding litigation/environmental exposure/uncertainty over how to value some item of litigation/fill in the blank, so we are not going to go through with the deal. If only we could have gotten around that issue, we would be closing right now.” This unfortunate scenario is played out all the time as deal impediments arise that cannot be resolved with legal solutions, purchase price adjustments, pledges of indemnification, or escrows. The frustration resulting from lost time, due diligence expense, and the loss of expected benefits is felt by all of the parties to the transaction, including in-house and outside counsel. If you can’t find a way around the deal impediment, that will not be forgotten by your client. Lawyers increasingly are expected to go beyond their role as legal advisers to help find solutions to business problems. Being able to advise your clients on business issues and helping them to improve performance and profitability not only proves your value as a lawyer but also, more important, differentiates you from other lawyers. Clients expect their legal counsel � in-house and outside � to know the law, but what they really want is for their lawyer to make a difference by being resourceful, by being a problem-solver, by thinking outside the box. This means that corporate counsel need to expand their skill set and develop a network of expert resources. Increasingly, cutting-edge lawyers are turning to the insurance brokerage community for help in crafting customized solutions to their clients’ problems. THE PROBLEM WAS ESCROW Recently I received a call from a lawyer requesting help on a deal he had been trying to close for three months. The target was a subsidiary of a closely held corporation that was teetering on the brink of bankruptcy. The seller consisted of a number of interrelated parties whose personal animosities had grown over years of working together. In completing the due diligence review of the target, the lawyer had become concerned about lax record keeping and other “family” issues, a concern he had shared with his client. The initial draft of the agreement had included a pledge of indemnification for any breach of representations made by the seller. This was quickly rejected by his client due to the shaky financial condition of the seller and concern over the “family” issues. An escrow provision was added, but the two sides were very far apart on the right dollar amount to be put in escrow, as well as the length of time required. This difference was rapidly becoming a deal-breaker as the client required a substantial escrow in order to close. The seller refused to raise the escrow, and the buyer was unwilling to take the risk of having an insufficient escrow in light of their concerns. The buyer was about to walk away from the deal when the lawyer called seeking insurance advice. He had heard about transactional insurance products and was hoping that something could be done to save this deal. After reviewing his client’s concerns, we advised that a representations and warranties (reps) policy could be put in place that would allow the buyer to free the sellers from any future indemnification obligation, eliminate the need for an escrow, give the buyer a direct claim on a highly rated insurer, and give them the security they needed to close. Not bad when you consider that the sellers would likely cut the purchase price to pay for the insurance in lieu of having to post a long-term escrow. Working with the lawyer, we put confidentiality agreements in place with two insurers who were highly rated and could provide competitive terms and conditions. We then put together a package of materials including the latest draft of the agreement, the schedules, a copy of the due diligence report prepared by the lawyer’s firm for the client, the book on the deal prepared by the investment banker, and a memo outlining the client’s concerns and desire for coverage. INSURERS TO THE RESCUE After an initial review of these documents and a discussion with the lawyer and his client, both insurers gave us a written indication of their interest in writing a reps policy to match the client’s needs. After we reviewed the terms with the client, they chose the insurer that they felt best addressed their concerns. The insurer had asked for a $10,000 fee to hire outside counsel to help them review the documents provided by the buyer. The funds were wire-transferred the next day and the insurer’s outside counsel immediately began review of the due diligence documents. We then arranged for a series of conference calls with the various parties and provided responses to a few questions raised by the insurer’s outside counsel. Within a few days, the insurer confirmed that they were prepared to write a reps policy to replace the seller’s escrow at the terms and pricing initially indicated. With a firm commitment in hand, the buyer returned to the bargaining table with a solution that allowed the seller to walk away after the closing with no future indemnification obligation and no requirement for an escrow. And the buyer was able to close the deal with a contract of indemnification from a highly rated insurer to back the seller’s representations in the agreement. TRANSACTIONAL INSURANCE PRODUCTS This example, though quite simplistic, demonstrates the beauty of transactional insurance products in helping clients to quantify the risk of loss and to transfer that risk to a third party in order to remove a deal-breaking problem. These products can help bridge the gap between the desire of your client for certainty in valuing a deal and the fuzzy reality of what may be found during due diligence. Four types of products are generally available: • Reps policies can be purchased by either the buyer or the seller in a deal. Buyers often use this product to close a deal by releasing a seller from any indemnification, to replace or top up escrow amounts, or to replace a financially shaky or bankrupt seller with a highly rated insurer. Sellers often use this product to avoid tying up capital in a long-term escrow, thus freeing up cash for other projects, improving returns to investors, and shifting the uncertain burden of indemnification for a fixed, reasonable, and often tax-deductible cost. • Loss Mitigation insurance can be used to quantify outstanding litigation when the parties to a deal cannot agree on a proper reserve or when a bank or other financial backer will not support the deal until the litigation is resolved or ring-fenced. • Tax insurance can be used to financially bolster a law firm’s or accounting firm’s opinion when a client relies on that opinion to take a tax position despite some concern that the position might not hold up to the scrutiny of the Internal Revenue Service, or when a client is considering taking a tax position that will possibly require a reserve to be posted on its balance sheet. • Environmental insurance can be used to quantify environmental exposure in a transaction by providing protection against unexpected future claims or unforeseen developments that might arise during cleanup of polluted sites. Transactional insurance products are very customized insurance contracts that must be carefully structured to provide the protection that your client needs while meeting the requirements of the law and regulators. Properly structured, these products can provide solutions to many problems that lawyers regularly face when trying to close deals for their clients. Corporate counsel, whether in-house or outside, who are familiar with these products and turn to an insurance adviser for help will enhance their value with clients. After all, clients want lawyers with the skills and the resources to close deals. Tony Rosa is a member and managing director of Rhodes Group LLC, a New York-based investment banking partnership that serves a number of business sectors. He is also president and CEO of the Rhodes Insurance Services Corp., an insurance brokerage, advisory, and services company. Comments, questions, and suggestions for future articles may be sent to him at (732) 996-0257.

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